Today, Barack Obama announced his intention to push for the US federal minimum wage to be lifted to $9 per hour by 2015, and then indexed to inflation.

In case anyone is interested in how the Australian minimum wage[fn1] stacks up against other advanced economies, I thought I’d post a few charts. As at February 2012, the National Minimum Wage is $15.96 per hour, which works out to $606.40 per week for full-timers. The rate is higher if you’re a casual employee (and therefore don’t accrue paid annual leave and sick leave). To find the minimum wage that applies in a particular circumstance, try the Fair Work Ombudsman.

Here’s the real minimum wage over time:

A common way to compare minimum wages over time and across jurisdictions is by expressing them as a proportion of the median or meanwage of a full-time worker. I tend to use the median. During the 1980s and 90s, the ratio of the minimum to the median in Australia was the highest of the OECD advanced economies. We’re now falling back towards the middle of the pack.

In 2011, our minimum wage was worth 53.6% of the median. That was the seventh highest of the 23 OECD countries for which OECD Stat has data.

Here’s how our minimum/median ratio compared to America’s. Note that for us, real median wages have grown in recent decades, and so have real minimum wages. In the US, both have been pretty much stagnant.

Another way to compare minimum wages across countries is by converting them to a common currency, by using ‘purchasing power parity’. This expresses each one in terms of the quantity of goods and services it can buy. In 2011 the minimum wage was $AU15.50 – the OECD thinks this would’ve bought you goods and services equivalent to what an American could buy with $US9.50.

Finally, I’ll just note that there are countries that have relatively high minimum wages and low unemployment (The Netherlands, Luxembourg, Australia), some that have high minimum wages and high unemployment (Ireland, France), and some that have a low minimum and high unemployment (Spain, Greece). By presenting this chart, I’m not trying to suggest that a higher minimum wage lowers unemployment, nor am I trying to pretend that this simple scatterplot controls for all differences between countries. I’m just pointing out that there isn’t much of a relationship across countries between the level of the minimum wage in a country and its unemployment rate.

[fn1] Australia has a National Minimum Wage, plus a range of minima that apply in awards based on your skill, experience, industry, etc. In this post, references to “the minimum wage” are to the NMW and its equivalent, the C14 rate in awards.

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Thanks for the interesting post. I wonder what would happen if you regressed unemployment on drivers of unemployment (trailing GDP growth, consumer sentiment, education levels, etc) and minimum wage. Also, it’s not clear that the headline minimum wage accurately reflects the true costs of hiring a minimum-wage worker; on-costs would be an interesting inclusion.

It looks like the minimum wage rose fastest when John Howard was in power. It seems to have slowed since.
The effect on employment is ambiguous. The best argument against the minimum wage is that it’s poorly targeted and much more expensive than a simple government wage subsidy or tax credit.

From 97-2005, it rose at a steady pace, roughly keeping pace with the Wage Price Index. From 2005 to now, each increase has more or less just compensated for inflation since the previous increase, with small real increases on top of that in 2006 and 2012.

I might be wrong about this, but I think during the Howard era the Australian Government usually argued in its submissions for increases in minimum wages that were less than the increase in the WPI. So even though this was a period where the real minimum wage increased steadily, I think it was despite what the government of the day wanted.

‘Minimum wages are based on skill
There are a range of minimum award wages, depending on the skill involved in the job. Note that there are also different minimum wages for workers covered by awards in the State industrial relations systems.

‘Since 2000, unions have been successful in achieving about $120 a week more than employers have offered in minimum wages cases. This is a significant achievement considering the challenge for unions in operating for most of this time under the former Howard Liberal Government’s unfair IR laws.

It is also worth noting that unions vigorously pursue a pay rise in minimum wages cases for award workers despite the fact that most are not members of unions’.

Hi,
Yes, I have a hand in writing the ACTU submissions to the annual wage review. I’m not quite sure what your point is. You’ll note that in my foot note I did point out that we have a skill-based vector of minima that sit atop the national minimum wage.

He has a point! I wasn’t trying to obscure the fact that we have lower minima for juniors.

However, to be complete, you’d also need to note:

1) We have a mandatory casual loading (typically 25%), which must be paid to any staff (incl. juniors) who do not receive paid annual leave and sick leave.

2) The National Minimum Wage and the associated minima for juniors are the ‘floor’ in the system, but many awards (legally binding sets of wages and conditions) provide for higher minima for people based on their industry/occupation/skill level.

3) Our system of penalty rates for work (such as on the weekend, or in the evening in some cases) means that the minima are higher than those listed at some hours in the day.

Australia’s system of minimum wage fixation is complex. By focusing on the adult National Minimum Wage, I wasn’t trying to deceive, but rather to simplify. If you are going to point out that lower minimum wages than the NMW apply in some circumstances (juniors, trainees/apprentices, certain people with a disability), then I think you must also take account of the fact that the minimum wages are higher than the NMW in many circumstances, too.

I mostly worry about extrapolating from Oz evidence to the US because the US just doesn’t have the kind of industrial wage setup that Oz has that allows differential industry/job level minimum wages that can mitigate some of the worst employment effects. The vast majority of Americans would never ever have heard about the Australian system and would expect that it’s like the one in the States – a national binding minimum wage that’s the same for everybody, maybe some State-level variation. That there are higher minima in some industries, presumably where the wage-setters figure it’ll sting less, is less important than that there are lower minima where they’d otherwise be nastily binding. A $25 minimum wage for brain surgeons wouldn’t bind.

Didn’t expect there was intent to deceive; it’s awfully easy for folks here to assume that those elsewhere just have the requisite institutional knowledge. I *barely* have institutional knowledge on this – I know enough to know that it’s complicated as all heck. I don’t know what fraction of the labour force are on national awards and so subject to the differential minima, and what fraction are salaried outside of the awards system.

[…] Matt Cowgill really should point out that if the US wants to follow Oz, it really needs to add in alternative and lower minimum wages for groups most likely to suffer disemployment effects of high minimum wages. […]

Good post Matt, very interesting. My only ‘qualm’ – and really it’s just a request for clarification – you suggest that the proportion of minimum wage to median wage is a good measure of the efficacy and fairness of a national minimum wage. Especially with the leading nation being Turkey, isn’t there a danger that what’s being measured is just the inefficiency of the labor market or a low wage ceiling?

Hi Mateo,
Turkey does stick out like a sore thumb, and maybe there’s a case for excluding them from these comparisons altogether. Their minimum/median ratio (called a ‘bite’) is high because their median is relatively low & their wage structure is compressed.

I do think the bite is a good way of comparing the level of the minimum between countries and over time. When we’re making those comparisons, what we really want to know is “what standard of living can a minimum wage worker attain, relative to the standard living of a typical worker in that society at that time?” The ‘bite’ doesn’t give us a complete answer to that question, as it looks at gross incomes rather than post-tax/transfer incomes, but it gets us a good way down the road.

Any other method is more flawed in my view: either you convert minimum wage rates at market exchange rates, which can give a distorted picture of their relative purchasing power when a currency diverges from PPP for an extended period as the AUD has; or you can convert minimum wages using PPP ratios, as I’ve done in one of the charts above. This is better, but PPP estimates are inexact. PPP conversion also doesn’t tell us about how minimum wage workers fare relative to other workers in their society. In advanced economies, I think this is the important question.

As an aside, I would argue that Turkey is especially poorly suited to comparison with the United States. Aside from that country’s fondness for the aspirational ‘American Dream’ narrative, I suppose that its labour market deregulation and concentration of wealth at the top would mean that its income ‘spread’ (the range b/w lowest and highest incomes) is far greater. Australia’s would be, as hopefully befits an effective redistrubtionist welfare state, somewhat more compressed.

The actual reason you’d exclude Turkey is not just that its rate is an outlier but that it has a very large informal sector where the legislation is “inoperative”. Of course an opponent of wage regulation would suggest that the size of its informal sector is actually a product of that very high legal minimum – you’ve given people a big incentive to evade it.

As for PPP, its best to do some sensitivity checking. Compare the time series using the Groeningen, Penn and OECD scales (though they’re not far apart at the moment anyway).

America needs to raise its minimum wage, because as of now the skills required to work are raising and the pay is decreasing and this is ruining the economy. If you raise minimum wage it will cause more people to desire entering the workforce, because they would make a decent livable wage. This will also jump start the American economy because people will have the money to buy more stuff/goods.

[…] the OECD – whereas the Australian national minimum wage is 53.6% of the median wage. We used to do even better. We fare as well as we do because of the case made regularly by the unions to the wage fixing body. […]